Bid Farewell to Libor!

Bid Farewell to Libor!

Dr. Fauzia Mubarik

The year 2021 bade farewell to the London Interbank Offer Rate (LIBOR) that ruled the global financial markets for almost 35 years. LIBOR has been a global benchmark reference rate for the financial instruments denominated in the currencies of the Pound Sterling, the Swiss Franc, the Euro, the Japanese Yen and the U.S. Dollar. This benchmark rate alone referenced toUS$350 trillion in the financial contracts (loans and derivatives)apart from the home mortgages, credit cards and student loans worldwide.The calculation of LIBOR comprised of the reference rates submitted by the participating banks by using the Waterfall Methodology. 

The collusion by the major global participating banks ascended the setback of LIBOR in the year 2008 that led to the famous ‘LIBOR Scandal’. This collusion was exposed during the global financial crisis in the year 2008.The major cause of the setback was the subjective manipulation of LIBOR by the participating banksprominently the Deutsche bank, Barclays, Citigroup, JP Morgan Chase and the Royal Bank of Scotland.That is why, the Financial Conduct Authority (FCA) of Britain transferred the supervision of LIBOR from the British Bankers Association (BBA) to the Intercontinental Exchange’s Benchmark (ICE) Administration and therefore since its complete absorption, it shall be known as ICE LIBOR.

The one-week and two-month LIBOR has completely ceased out in the year 2021 while the overnight, 1-month, 3-month, 6-month, and 12-month maturities shall continue to publish though the year 2023. The phasing out of LIBOR has paved ways for variant Alternative Reference Rates (ARR)approved by the Alternative Reference Rates Committee to become LIBOR’s successors which are the Secured Overnight Financing Rate (SOFR) of United States, Sterling Overnight Index Average (SONIA) of England, Euro Short-Term Rate (ESTR) of European Union, Swiss Average Rate Overnight (SARON) of Switzerland and Tokyo Overnight Average Rate (TONAR) of Japan. These ARRs shall offer the interest based reference rates to the well-established global financial markets to continue with their financial services. Nonetheless, the Islamic Interbank Benchmark Rate (IIBR) that was launched in 2011 also finds a lucrative opportunity to get in line on the global financial terminals with a market worth of $3.8trillion of global Islamic financial assets. One lesson that needs to be learnt by LIBOR’s successors is of ‘Financial Ethics’ while dealing withfinancial contracts.

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